Summary Bitcoin is discussed as an investment option with potential for diversification and gains, but not suitable for everyone due to volatility. I have a small position in Bitcoin and follow the sector closely, and I believe now is a decent time to add. The recent shift to an inverse relationship with global equities reinforces this idea as a portfolio hedge. Main Thesis/Background The purpose of this article is to discuss the alternative cryptocurrency Bitcoin (BTC-USD) as an investment option at the current market price. Many retail investors have been closely following BTC - and other cryptos - for a long time and have certainly seen both the rewards and the potential for sharp losses. I will say straight out that these are investments that aren't for everyone given the nature of them and their volatility. But, for the right investor, the large swings offers the potential for both diversification and handsome gains. I have a very small position in BTC myself, but I follow the broader sector closely along with many out of curiosity on where it is headed. Is this truly a revolutionary trend, or one that will eventually crash and burn? It has been fun to watch and will continue to be. It is worth noting I am not a crypto "loyalist" so to speak, and won't use this review to espouse why this is a "sure thing" investment that everyone needs to get in to. Rather, I use this position as a way to diversify and, more recently, to hedge my bets on a more dovish Fed and weaker dollar 2024. For perspective, I last wrote about BTC directly over a year ago. At that time I was not actually very bullish on the currency, and placed a "hold" rating on it. This turned out to be a reasonable call because, despite the coin's recent surge, it is still down almost 10% since that article was written: Bitcoin Performance (Seeking Alpha) Obviously, a lot has happened since then, so I felt now was as good a time as any to do an updated review. With 2024 approaching rapidly, do more gains lie ahead for BTC, or are we on the verge of another correction? Personally, I see merit to owning/starting a position at these levels, and I will explain why in greater detail below. What's Behind The Recent Climb? To begin this review I want to take a moment to reflect on the macro-story for BTC over the next year. While there have been ups and downs, in the shorter term this investment has done extremely well. In fact, in 2023, BTC has more than doubled - obviously a move that any investor would welcome! YTD Gains (Google Finance) As you can see, the market (as measured by large-cap stocks) is also up strongly, but BTC easily takes the cake. This tells me that an examination of the why behind this surge is very relevant to determine if more gains are even feasible. After all, when any investment doubles, I believe one should take time to reflect on what has changed and whether a portfolio adjustment is required. So - why has BTC been rallying? The answer to this is multi-fold. I certainly won't cover all the reasons in this article, but I will touch on some of the main points. The first is that inflation has been on the decline, not just in the US but worldwide. BTC, and cryptocurrencies more broadly, can be seen by some as a dollar/traditional currency hedge much in the way that gold or crude oil are. This means that as developed market currencies (especially the USD) weaken, that can act as a bullish catalyst for BTC: Annual Inflation (Developed Markets) (World Bank) This is a trend that is likely to continue as economic readings show weakness in both the US and EU-zone in particular. If inflation continues a decline, the Fed and other central banks can stop hiking interest rates. That can bode well for risk-on assets and currency alternatives like BTC. A second reason for the bull run is the possibility of the first spot BTC ETF being approved by U.S. regulators. Last month, Grayscale filed a new application that would allow its Grayscale Bitcoin Trust (GBTC) product to function as a spot Bitcoin ETF. At present, it trades in futures. The implication here is that by offering a SEC-approved ETF it will do a number of things. It will boost the legitimacy of the investment. This could widen its appeal - especially among more cautious retail investors (I include myself in this equation). If so, it will drive demand and the price higher. Further, it could result in additional ETF filings by other fund managers - if the Grayscale effort succeeds. More options, more availability, more likely to push prices higher. A third reason for BTC's rise is that much of last year's bad news is starting to fade. Investors likely remember that crypto as a whole took it on the chin for most of 2022. This is why, despite BTC more than doubling in 2023, it is still posting a negative return since my 2022 article. Much of this stemmed from upheaval in the broader sector, with negative headlines, exchanges being shut down, and lawsuits flying around. Think back to the FTX bankruptcy and the arrest of CEO Sam Bankman-Fried. This was a huge deal that shattered confidence and caused some investors to reduce their exposure across the crypto universe. The conclusion I draw from all this is that investors had plenty of reasons to be jittery in 2022 and early 2023 too. I am not suggesting some of these macro-headwinds have gone away completely - they haven't - but investor sentiment can be fleeting. Much of this bad news seems "old" now, and the market is likely looking ahead to better times rather than focusing on past negativity. This is surely driving part of the rebound this year after a terrible 2022. How Is BTC Useful Going Forward? I have covered a few fundamental reasons for why BTC has climbed so strongly in the past year. But the more important story at the moment is what could sent BTC even higher . After all, past gains are only that - in the past. What the future holds is what concerns us now. So - why is BTC still a relevant asset to hold in one's portfolio? Personally, I think the usefulness of BTC has increased in the short-term for a key reason. The correlation between BTC and global stocks has shifted negative again. This means the two asset classes are moving inversely (on average), which is actually a central reason to why I started a position in the first place: BTC's Correlation to Stocks (Yahoo Finance) This is a main driver for me to stay invested because it reverses a trend I viewed negatively last year. When BTC's correlation to stocks began to rise, which I touched on in my 2022 article, I saw less usefulness for the asset. I wanted an asset that was going to protect me against some equity volatility, just like bonds, gold, oil, and the utilities sector can often do. When BTC began moving lock-step with stocks, I saw this aspect for investing in it diminishing. Now, based on recent performance, this trend has changed and BTC is once again acting in a way different from stocks. This doesn't mean that BTC will move higher or perform well, but it does mean it is helping to diversify my portfolio in a stronger fashion. That piques my interest for it, and I'm sure it does for other investors as well. A Lot Of Momentum From Many Buyers Another reason to be a BTC bull right now is that investor buying is only beginning to pick up steam recently. After weeks and months of net outflows, buyers are stepping up in a big way, driving gains across the whole sector: Weekly Crypto Asset Flows (CoinShares) And the good news is the buy-side is diverse. According to the data compiled by the exchange, the largest inflows were from Canada, Germany and Switzerland, with the US accounting for 12% of the inflows. This shows that the trend is a global one. The fact that it is gaining steam is great for momentum buyers in the short-term. Skeptical Minds Are A Tailwind My final point for the time being is that general distrust (or perhaps frustration with) of the global financial system is helping to support valuations of "alternative" forms of currencies and payment systems. This is a bit of a trend not just in the US, but globally, as more people feel disillusioned with traditional banking and financial systems. This is due to a number of factors, but high profile regional bank failures , persistent inflation, and a growing wealth gap are all contributing to it. Let's look at the US as an example first. Domestically, "trust" in the government is at historic lows. This extends to both the state and federal governments, but also the other institutions that are supposed to represent the public's interest - like the Federal Reserve or the US Treasury: Public's Trust in Government (USA) (Pew Research Center) And this skepticism extends beyond just the "government". A poll conducted by the Associated Press earlier this year revealed the following: 10% of Americans say they have high confidence in the nation's banking institutions, 57% do have some confidence; 31% have hardly any." Source: Associated Press What this adds up to (in my opinion) is that investors are continuously searching for the next "alternative" to traditional forms of government and banking. Bitcoin is not just fulfilling an investment craving, it is attracting people who want some way to rebel against the institutions they do not trust. With little on the horizon to improve the government's standing in the public's eye, I believe this reality remains a tailwind going in to 2024. Bottom line Bitcoin has been on a roller coaster the past two years, but 2023 has been very kind to it and other cryptos. While I reiterate this is a very volatile asset and is not for the risk-averse, I do see the potential for continued gains ahead. BTC is benefiting from wider adoption, a renewed negative correlation with equities, and interest due to the public's distrust on traditional institutions and norms. Add this all up and I have to conclude the risk-reward proposition is favorable here. As a result, I am considering adding to my position at these levels, and suggest my readers give this idea some thought at this time.
